🎯 In 30 seconds: Regular candles plot every session, so they show every wiggle. Heikin-Ashi averages the candles. Renko, point and figure, Kagi and line break go further and ignore time, adding a mark only when price moves by a set amount. That can make trends and reversals easier to see. The price is that these charts hide information, lag the market, and in some cases show prices that never traded.
Two ways to filter a chart
All five chart types in this chapter try to answer one question: which moves are noise? They take two different routes.
- Smooth the candles. Heikin-Ashi keeps one candle per session but builds each one from averages.
- Ignore time. Renko, point and figure, Kagi and line break add a new mark only when price moves far enough. A quiet week might add nothing. A wild day might add several marks.
Charts that ignore time compress quiet periods and stretch busy ones, so a pattern on them can span three days or three months.
Heikin-Ashi
Heikin-Ashi means roughly “average bar” in Japanese. Each candle is built like this:
- HA close = (open + high + low + close) / 4 of the current session.
- HA open = (previous HA open + previous HA close) / 2.
- HA high = the highest of the session high, HA open and HA close.
- HA low = the lowest of the session low, HA open and HA close.
Because each open is the midpoint of the previous candle, HA candles change color only after the averages turn. In a strong uptrend you see long runs of up candles with little or no lower wick. Small bodies with wicks on both sides suggest the trend is pausing.
A quick calculation (hypothetical). Yesterday’s HA candle opened at $20.50 and closed at $20.80. Today’s real session has open $21.00, high $21.60, low $20.40, close $21.40. HA close = (21.00 + 21.60 + 20.40 + 21.40) / 4 = $21.10. HA open = (20.50 + 20.80) / 2 = $20.65. The HA candle runs from $20.65 to $21.10, even though no trade necessarily happened at either price.
Never place an order at an HA price or measure a stop from one. Read the trend on HA, then plan the trade on regular candles.
Renko
A Renko chart is made of equal-sized bricks. You choose the brick size, for example $1, or an amount based on ATR so it adapts to the stock.
- A new up brick is added when the close rises a full brick above the top of the last brick.
- A new down brick, in a rising sequence, needs the close to fall two bricks: one to get back to the bottom of the last brick and one more beyond it. Most versions work this way, so a reversal costs two bricks of movement.
- Anything smaller is ignored. Time is ignored too, so bricks sit at a fixed angle.
Renko shows clean trends and clear levels. But the brick size changes everything: $1 and $2 bricks on the same stock can tell different stories, and bricks appear only after the move.
Point and figure
Point and figure is one of the oldest charting methods and records price in boxes:
- Box size. The price step for each mark, for example $1.
- X column. Rising prices. Add an X for each new box reached.
- O column. Falling prices. Add an O for each new box reached.
- Reversal amount. How many boxes price must move against the column before a new column starts. Three boxes is the classic choice.
The basic signals are simple. A double top buy occurs when an X column rises one box above the top of the previous X column. A double bottom sell occurs when an O column falls one box below the bottom of the previous O column. Longer versions, such as a triple top buy, need two earlier columns at the same level.
Users also project targets with a count based on the width of a base, the box size and the reversal amount. Treat it as a rough distance, not a forecast.
Kagi
A Kagi chart is a single line. It keeps extending in one direction until price reverses by a set amount, then it steps sideways and runs the other way.
Its special feature is line thickness. The line turns thick (often called yang) when it rises above the previous peak, called a shoulder. It turns thin (yin) when it falls below the previous trough, called a waist. Traders read the switch from thin to thick as a buy signal and thick to thin as a sell signal. In the figure, the line stays thick until it falls through the earlier low near $55.
Line break
A three-line break chart draws a block, or line, each time the close makes a new high or low beyond the last block. Blocks continue in the trend’s direction as long as new extremes keep coming.
To reverse, the close must go beyond the extreme of the last three blocks. In a rise, that means a close below the lowest point of the last three up blocks. The bigger the trend, the more ground a reversal must cover. Some versions use two or four lines instead of three.
Choosing one
| Chart | A new mark when | Hides | Good for | Watch for |
|---|---|---|---|---|
| Heikin-Ashi | Every session | Exact prices, short wiggles | Seeing trend runs | Prices that never traded |
| Renko | Close moves one brick | Time and small moves | Clean trends and levels | Results depend on brick size |
| Point and figure | Price fills a new box | Time and moves under one box | Breakout signals and counts | Box and reversal choices |
| Kagi | Price extends or reverses by a set amount | Time and small reversals | Shoulder and waist breaks | Signals arrive late |
| Line break | Close makes a new extreme | Time and closes inside the range | Spotting trend changes | Reversals need large moves |
What to check before trusting a signal
- Did you choose the settings before looking for signals?
- Does the same signal appear with a slightly larger and slightly smaller setting?
- Do regular candles agree, and what are the real trade prices for your entry and stop?
- How much of the move happened before the signal appeared?
- Is there an earnings date or other event inside your holding period?
- Why should you not place a stop at a Heikin-Ashi low? Answer: Heikin-Ashi prices are averages and may never have traded. Stops should be set from real prices on a regular chart.
- On a $1 Renko chart in an up sequence whose last brick runs from $49 to $50, what close adds a down brick? Answer: A close at or below $48, two bricks of movement from the top.
- What is a double top buy on a point and figure chart? Answer: An X column rising one box above the top of the previous X column.
- What makes a Kagi line turn thick? Answer: Rising above the previous shoulder, the prior peak in the line.
Sources
- John J. Murphy, Technical Analysis of the Financial Markets (1999). Chapter on point and figure charting.
- Perry J. Kaufman, Trading Systems and Methods. Further reading on charting systems and filters.
- Steve Nison, Japanese Candlestick Charting Techniques (1991). Background on Japanese charting traditions.
- David Aronson, Evidence-Based Technical Analysis (2007). On data-mining bias when many settings are tried.
- Moneydesks Technical Analysis tool: Heikin-Ashi, Renko, line break, point & figure and Kagi chart types.